Ladies and gentlemen, thank you for standing by, and welcome to the WellPoint Fourth Quarter Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to the company's management.

Michael Kleinman

Good morning, and welcome to WellPoint's Fourth Quarter Earnings Conference Call. I'm Michael Kleinman, Vice President of Investor Relations. With me this morning are Angela Braly, our Chair, President and Chief Executive Officer; and Wayne Deveydt, Executive Vice President and Chief Financial Officer.

Angela will begin this morning's call with a summary of our fourth quarter and full year 2011 performance. Angela will also provide an overview for our strategies for continued success in 2012 and beyond. It will be followed by Wayne, who will review our 2012 financial expectations and capital management plans in detail. Our prepared remarks will be followed by a question-and-answer session. Ken Goulet, Executive Vice President and President of our Commercial Business; and Brian Sassi, Executive Vice President and President of our Consumer Business, are available to participate in the Q&A session.

During this call, we will reference certain non-GAAP measures. A reconciliation of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP is available on our company website at www.wellpoint.com.

We will also be making some forward-looking statements on this call. The listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint.

These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our press release this morning and in our quarterly and annual filings with the SEC.

I will now turn the call over to Angela.

Angela F. Braly

Thank you, Michael, and good morning. Today, we're pleased to report fourth quarter and full year 2011 results that are at the high end of our guidance range. In the fourth quarter, earnings per share totaled $0.96 and included net investment losses of $0.03 per share. Earnings per share in the fourth quarter of 2010 totaled $1.40, including net investment gains of $0.07 per share.

Excluding the net investment gains and losses in each period, our adjusted EPS was $0.99 in the fourth quarter of 2011 compared with adjusted EPS of $1.33 in the same period of 2010.

Our fourth quarter results concluded a successful 2011 for our company. During the year, we added 928,000 new medical members and achieved financial results that were in line or better than we expected in most of our businesses. We also created a more efficient organization and executed on a number of strategic initiatives as we prepare to capitalize on the important future growth opportunities we see in the marketplace.

For the full year of 2011, we reported GAAP earnings per share of $7.25, which included $0.25 per share of net investment gain. Excluding the net investment gains, our adjusted EPS was $7, which exceeded our original plan and represented an increase of 3.9% from adjusted EPS of $6.74 in 2010.

We've now grown adjusted earnings per share for 3 consecutive years, and we expect our positive momentum to continue in 2012.

As of December 31, 2011, our medical enrollment totaled nearly 34.3 million members and represented approximately 11% of the U.S. population. Our enrollment decreased by 104,000 during the fourth quarter as we lost one very large self-funded group and, to a lesser extent, continue to experience negative in-group change.

For 2012, we expect that in-group membership change will continue to be negative, although the amount of attrition has and should continue to moderate.

As we've discussed previously, we remained thoughtful and disciplined in our actions throughout the year and currently expect enrollment to decline by 600,000 members in 2012. Most of this is the result of specific actions we've taken with certain self-funded National Accounts, in the California regional PPO Medicare Advantage product and in the New York small-group market.

With the most recognizable brand name in our industry, comprehensive and high-quality provider networks, strong medical management program, a leading cost structure and excellent customer service, our value proposition remains very compelling. We believe our 2012 plan reflects a proper balance between generating appropriate returns for the value we're providing to our customers and positioning the organization for continued profitable growth beyond 2012.

Despite these selected membership declines in 2012, we've had a positive start to the year. In Commercial, sales remained strong due to our value proposition, and we had successful open enrollment results outside of the specific decisions we made on certain accounts and in certain markets.

In the Senior business, our sales of both Medicare Advantage and Medicare supplement products met our goals, and membership retention has been in line with our expectations. We put our customers first and took a number of actions to make sure our customers' needs were met concerning the Walgreens' exclusion from our pharmacy network. Today, the Walgreens' contract termination with Express Scripts has not meaningfully impacted our medical enrollment.

Our operating revenue totaled approximately $15.2 billion in the fourth quarter of 2011, an increase of 5.5% from the fourth quarter of 2010, approximately 1.6% of the increase related to the CareMore acquisition. The remaining 3.9% was driven by premium increases designed to cover overall cost trends and membership growth in the Senior business, partially offset by a decline in fully insured Commercial membership.

Our operating revenue was just under $60 billion for the full year of 2011, an increase of 3.7% from 2010. Overall, the marketplace is competitive but generally rational. Our benefit expense ratio was 87.6% in the fourth quarter of 2011, which was in line with our expectations and represented an increase of 310 basis points from the fourth quarter of 2010. The increase was driven by our Consumer segment and included adverse selection in certain Medicare Advantage products.

While most of our businesses performed well in 2011, results in Senior were significantly behind our plan. We believe we have taken the appropriate action to improve our Senior business results for 2012.

Our fourth quarter benefit expense ratio also increased in the Local Group business as we complied with the Patient Protection and Affordable Care Act, or PPACA, and as a result of changes in reserves. In the fourth quarter of 2010, we recognized an estimated $105 million of pretax income due to a reduction in the targeted margin for adverse deviation and higher-than-anticipated prior-period reserve development.

For the full year of 2011, the benefit expense ratio was 85.1%, an increase of 190 basis points from 2010, driven primarily by higher medical costs in the Senior business, changes in prior-period reserve development and the impact of minimum medical loss ratio requirement in PPACA.

We estimate that underlying medical cost trend in our Local Group business was approximately 7% for the full year of 2011. Medical cost trend increased during 2011 but by less than we originally anticipated. Unit cost increases, including an increase in the acuity of services, continue to be the predominant driver of overall medical cost trend.

During 2011, we executed on a number of initiatives designed to improve the quality and cost of healthcare for our members. We formally announced our value-based contracting initiative, where the vast majority of hospital payment increases are predicated on a demonstration of customer value, such as participation in our Quality Insights Hospital Improvement Program, or QHIP. We're also focusing our strategy on collaborating with primary care physicians in ways that allow them to thrive in a value-based environment while helping our members manage their health.

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